Both Manufacturing and Mining Production Expanded Strongly

Malaysia’s industrial production index (IPI) rose sharply to 6.8% yoy in August, the highest yoy increase since March 2015 (6.1% in July 2017). This was higher than market expectation of 5.8%. The better-than expected IPI growth was reflected mainly in the output of the manufacturing and mining sectors. Growth in mining activity rose strongly to 5.3% yoy in August (0.2% in July), due partly to the higher output of natural gas and low base effect in the corresponding period last year.

Growth in manufacturing production also expanded strongly in August, rising by 7.6% yoy, albeit slightly lower than 8% in July, with output of refined petroleum products rising sharply from 3.1% yoy in July to 10.2% in August. This was also in tandem with two consecutive months of strong exports of refined petroleum products in July and August. Output of E&E products was also sustained at 8.7% yoy in August (10.5% in July), but production of semiconductors slowed from 17.7% yoy in July to 10.7% in August. However, all the other major sub-sectors under E&E, i.e. computers, electronics & optical, electrical equipment and machinery & equipment, showed healthy growth at 9%, 8.4% and 5.7% respectively during the same month. On the other hand, production of transport equipment and other manufacturers rose to 9.9% yoy in August (6.8% in July). According to the latest report by the Semiconductor Industry Association (SIA), global sales of semiconductors rose by 24% yoy in July and August, supported by demand from the US and Asia Pacific regional markets.

Steady growth in the export-oriented industries also reflected stronger growth in the global economy, with higher demand for Malaysia’s manufactured goods from the US and China. The latest OECD composite leading indicators (CLIs), which is designed to provide early signals of turning points in economic activity, stayed at the 100.1 level in July-August, higher than 100 in 2Q17, reflecting healthy growth in most major OECD countries. We believe the country’s export-oriented industries will remain supportive of manufacturing production in the months ahead.

The International Monetary Fund (IMF), in the latest October’s World Economic Outlook Update report, raised its forecast for global growth for 2017 and 2018 to 3.6% and 3.7% respectively, by 0.1 percentage point in both years as compared to the April and July forecasts.

Domestically, growth in the manufacture of non-metallic mineral products, basic metal & fabricated metal products expanded steadily by 7.1% yoy in August (7.6% in July), possibly due to ongoing infrastructure investment projects in the country, which is supportive of the economy. We believe both private investment and consumption will support the domestic-oriented industries.

Real GDP Growth Is Projected at 5.6% Yoy in 3Q17

IPI growth rose from 4.3% yoy in 2Q17 to 6.5% in July-August, where growth in manufacturing output rose strongly by 7.8% during the same period, significantly higher than 6.2% in 2Q17. As a result, mirroring the strong economic performance in 2Q17, the contribution to GDP growth by the manufacturing sector will likely be higher by an estimated 7.5% yoy for 3Q17 (6% in 2Q17). Thus, we estimate that real GDP growth is likely to be at a stronger pace of 5.6% yoy for 3Q17, against our earlier estimate of 5% (5.8% in 2Q17), reflecting stronger exports and domestic demand.

Revising Higher Malaysia’s Real GDP Growth Forecast to 5.5% for 2017

We believe Malaysia’s main exports of electronic and electrical products, which account for close to 38% of the country’s total exports, will be supported by global semiconductor sales and a steady global economy. For 2017, we are revising higher our real GDP growth forecast for Malaysia to 5.5%, from our earlier expectation of 5.2% (4.2% in 2016). The upgrade in the real GDP growth forecast also reflects the sharp economic growth of 5.7% yoy in 1H17. For 2018, we are projecting real GDP growth to be sustained at a slower pace of about 4.9% due partly to higher base effect.

Source: Affin Hwang Research - 13 Oct 2017